The progress in sequencing of complete genomes highlights the growing need to understand the structural principles underlying the folding and function of proteins. In FY00, we have focused on three major aspects: (1) Ab initio folding of peptides: Based on extensive computer simulations at full atomic detail and including solvent, we have successfully studied the reversible folding of small alanine and glycine based peptides into alpha-helices. This allowed us to identify the energetics, time scales, and mechanisms of the initial phases of helix formation as a critical step in protein folding. Our results also shed new light on a recent experimental controversy, supporting laser temperature jump experiments, but disagreeing with stopped-flow circular dichroism measurements. (2) Protein dynamics and identification of essential modes: One of the key steps leading from protein structure to function is the identification of the essential dynamics, associated for instance with substrate access and release, or with catalytic activity. From an analysis of the time evolution of protein conformations in molecular simulations, we developed a new estimate of the number of degrees of freedom that are relevant in a particular time regime. (3) Ligand binding and hydrophobic effects. One of the main objectives of computational structural biology is the design and optimization of drug molecules. We are developing a hydrophobic force field that allows us to map regions at the protein surface with strong hydrophobic interaction centers to bind ligands. Preliminary results for an inhibitor of the HIV-1 gp41 fusion peptide show excellent agreement with a combinatorially optimized ligand, and with explicit, but computationally demanding molecular simulations.